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Tuesday, October 30, 2007

Home prices in 20 U.S. metropolitan areas slumped in August by the most in at least six years, a private survey showed today.

Values dropped 4.4 percent in the 12 months that ended August, an eighth consecutive decline, according to the S&P/Case-Shiller home-price index, which has data back to 2001.

The figures reinforce the view among Federal Reserve officials and Treasury Secretary Henry Paulson that the housing slump has further to go. Near-record inventory levels suggest sellers will continue to lower prices, posing a threat to consumer spending because homeowners will have less equity to borrow against.

This is really the No. 1 risk: a sustained, sharp decrease in home prices really squeezing consumers,'' said Meny Grauman, an economist at Scotia Capital Inc. in Toronto.

Economists forecast the gauge would decrease 4.2 percent, according to the median of 11 estimates in a Bloomberg News survey.

The group's 10-city composite index, which has a longer history, dropped 5 percent in the 12 months ended in August, the most since June 1991.

In a separate report, an index of consumer confidence declined to 95.6, the lowest since October 2005, from a revised 99.5 the prior month, the New York-based Conference Board said. The index was forecast to drop to 99, from an originally reported reading of 99.8 for September, according to the median estimate in a Bloomberg News survey of 70 economists.

Compared with July, home prices in the 20-city index fell 0.7 percent after a 0.4 percent decline the month before. The figures aren't seasonally adjusted, so economists prefer to focus on the year-over-year change.

``The fall in home prices is showing no real signs of a slowdown or turnaround,'' said Robert Shiller, chief economist at MacroMarkets LLC and a professor at Yale University, in a statement. ``There is really no positive news in today's report.''

Shiller and Karl Case, an economics professor at Wellesley College, created the home-price index based on research from the 1980s.

The index is a composite of transactions in 20 metropolitan regions. Fifteen cities showed a year-over-year decline in prices, led by a 10 percent drop in Tampa, Florida, and a 9 percent decline in Detroit. The area showing the biggest gain was Seattle with a 5.7 percent increase.Fed Forecast

Most economists expect housing to extend its slump and continue to be a drag on economic growth as loan foreclosures rise and tougher lending standards make borrowing more difficult.Traders and economists expect the Federal Reserve to cut its benchmark overnight lending rate between banks tomorrow by at least a quarter point. Policy makers on Sept. 18 reduced the interest rate for the first time in four years, to 4.75 percent from 5.25 percent.

Paulson said today it's too soon to call an end to the housing slump.``We haven't hit the bottom yet in housing,'' Paulson said at a conference in New Delhi. Still, he added ``there is enough strength in the economy that we can grow through this.''Homeownership in the U.S. has dropped the last four quarters, the longest string of declines since at least 1981, the Census Bureau said on Oct. 26. Also last quarter, a record 17.9 million U.S. homes were vacant.

Sales of existing homes dropped last month to the lowest level since record-keeping began in 1999. The decline to a sales pace of 5.04 million annual rate brought the inventory of homes for sale to a record high of 10.5 months' supply. The median price of resales fell 4.2 percent from a year earlier.

The price measure from the Realtors group can be influenced by changes in the types of homes sold. Because the S&P/Case- Shiller index and another gauge by the Office of Federal Housing Enterprise Oversight track the same home over time, economists say these more accurately reflect price trends.

Recent price cuts may not be enough to bring in some buyers. Pulte Homes Inc., the third-largest U.S. homebuilder said Oct. 25 that the reductions it's enacted didn't boost sales last quarter.

``Time has proven that no one can be sure when this particular downturn will end or begin to show signs of stabilization,'' Chief Executive Officer Richard Dugas said on a conference call. ``Since we are not sure how long this environment will stay this bad, Pulte plans to be prepared for the worst.''

Wednesday, October 10, 2007

Banks must step up and provide loans during times of financial market distress and also help homeowners who find themselves behind in their payments of unfavorable mortgages, said Eric Rosengren, the new president of the Boston Federal Reserve Bank.

There might even be some profit opportunities for banks if they can move into the market for subprime mortgages, Rosengren said. Many of the independent brokers who created the market for subprime mortgages have gone out of business in recent months.

"While the subprime market that was the epicenter of the problem is likely to continue to have difficulties, I am hopeful that financial institutions will play an important role in providing financing for many of the borrowers facing higher rates as their mortgages reset," Rosengren said in his first speech after assuming his new post in July.

Subprime is the industry shorthand for mortgages that are not the highest quality. Many lower middle class families were able to buy homes with such loans, but the sector also includes mortgages for higher-priced homes.

Instead, the central issue was a lack of liquidity, as relatively low-risk financial assets traded between large financial institutions experienced the most difficulty.

Bank balance sheets expanded in August and September as securitization of subprime mortgages and other asset-backed commercial paper declined.

Rosengren said that "conservatively underwritten securitizations and asset-backed commercial paper will find acceptance by investors" but said this will take some time.

In his remarks, Rosengren did not dwell on the economic impact of the recent financial turmoil.He said that the effect of the problems in housing on consumption has been muted to date.But he said if housing prices fall further or if the price declines spread across the country, this "would increase the risk of a more adverse impact on consumption."

Tuesday, October 9, 2007

Earlier this year, when Merrill Lynch forked over $1.3 billion to buy subprime lender First Franklin Financial Corp., and some of its affiliates, a handful of executives were dancing in the hallways at National City in Cleveland. NatCity owned FFFC and, indeed, it would seem that they sold the subprime shop at the top of the market (and before the nonprime liquidity crisis reared its ugly head). But let's forget about FFFC for a moment. Does anyone see the irony of Merrill Lynch — known for selling stocks to America's wealthy — trying to make a buck by lending to credit impaired Americans? Let's not forget that Merrill was a major (and I do mean major) warehouse financier of non-banks plying their trade in subprime, including Ownit Mortgage, Mortgage Lenders Network and ResMAE, among others. What do all these lenders have in common? They all filed for bankruptcy protection. Some in the industry even speculated that Merrill was engaged in a plan to reduce the number of subprime lenders so that FFFC would have less competition, a thought that only a conspiracy theorist would hatch. One subprime executive who sold loans to Merrill told me that Merrill "was one of the most aggressive buyers of loans. They paid more than anyone and they did less due diligence." He blamed Merrill's woes on a top trader there, whose identity I'll get to in a future column as I continue to research the roots of this crisis. On Friday Merrill Lynch estimated that it will take $4.5 billion in credit-crunch-related writedowns (net of hedges) on subprime mortgages, collateralized debt obligations and leveraged finance commitments.